Funding QLAC
I am 72 years old and retired now. RMD will start next year (2025). I am planning to purchase QLAC ($200K) this year. My traditional IRA account holds both pre-tax and after-tax contributions. Will the pro-rata rule apply if I use the funds in the traditional IRA account to fund the QLAC? Also, what will do to the total basis, and how to keep track of it now and in the future?
I am also in the process of rolling over ONLY taxable funds from an employer 401(k) plan to a separate Rollover IRA account with my brokerage company, and the total basis for my IRA should not change by this rollover. If I use the separate Rollover IRA account to fund the QLAC, which will be tracked by the brokerage company, will it help to simplify the tracking of total basis?
Permalink Submitted by Alan - IRA critic on Tue, 2024-12-17 18:37
The QLAC is funded by a direct transfer to a QLAC IRA annuity with the insurance company. This is
not a taxable event.
Your IRA basis is tracked on Form 8606, which should have been filed for each year you made a non
deductible IRA contribution. The most recent 8606 will show your total basis. When you take a
distribution, RMD or otherwise, the basis is prorated with the total year end value of all your IRA
accounts, including the QLAC. After you purchase the QLAC, by the end of the following January the
insurance company should send you a statement reporting the total value of the QLAC as of the recent
12/31 date. You would add that value to that of all your other IRA accounts and enter the total value
on line 6 of Form 8606. If you do not receive notification of the value, ask the insurance company for it, as the IRS QLAC Regs issued in 2014 clearly state that such valuation be given to both the QLAC owner and the IRS.
Because all your IRA accounts are treated as one combined account for basis tracking, it does not
matter which IRA you use to fund the QLAC transfer. While the QLAC is exempt from RMDs until you
reach a certain age in your 80s, the year end value of the QLAC does not matter until you start
distributions, but that value will apply when determining the portion of distributions from your other
IRAs (RMDs) that are taxable and non taxable.